Posted on Friday, Jan 19th 2018
Billion Dollar Unicorn club member Stitch Fix (Nasdaq: SFIX) went public late last year and generated quite an applause for being the first woman led tech company to list in 2017. But the applause seems to have given way to skepticism as analysts feel that it will stumble like Blue Apron. Some even call the investment “too risky until it can prove that its business model can stabilize”.
Stitch Fix’s Financials
Recently, Stitch Fix announced its first quarterly result as a public company. Revenues for the first quarter grew 25.2% to $295.6 million, ahead of the analyst estimates of $295 million. Revenue growth was attributed to the 29.7% growth in active customers. Stitch Fix ended the quarter with 2.4 million active customers. Adjusted net income came in at $0.05 a share, better than the estimates of $0.04 for the quarter.
For the current quarter, Stitch Fix expects revenues of $287-$294 million, compared with the Street’s forecast of $296.3 million. The lower than expected revenues for the quarter drove the stock downwards by more than 10% post result announcement.
For the year, it forecast revenues of $1.17-$1.22 billion with an adjusted EBITDA of $40-$60 million. The market was looking for revenues of $1.18 billion for the year.
Stitch Fix’s Investments
During the quarter, Stitch Fix continued to diversify its offerings. It has been investing in new categories, primarily men’s and plus-sized apparel. It does not provide details of clients by category, but the company reported that within six months of the launch of men’s boxes, the number of items per delivery bought by male customers were equivalent to the number of items per delivery bought by its female subscribers. It is also seeing a strong demand in the Plus-sized segment, where it has a waiting list of more than 75,000 women for the apparel boxes before the category’s launch scheduled later next month.
Besides category expansion, Stitch Fix is also evaluating its price mix. It is working on adding inventory in the apparel priced in the $20 to $50 range, which is expected to be a lower range than what it was traditionally sourcing for. Within its core segment, Stitch Fix is adding newer features such as offering sales around specific events, like date nights.
These investments are impacting its overall gross margin. For the quarter, gross margin fell 290 basis points over the year to 43.7%. The investment will hurt short-term performance but should benefit the company in the longer run.
I believe Stitch Fix has a strong market opportunity. The US apparel, footwear, and accessories market is estimated to grow from $353 billion in 2017 to $421 billion by 2021. Researchers believe that within the segment, e-commerce will continue to remain a big growth driver. E-commerce within the apparel segment is expected to grow 11.4% annually to $94 billion – signaling a growing market opportunity for the company.
Many have compared Stitch Fix to the subscription-based meal delivery service Blue Apron. But subscription service is where similarities between the two companies end. Unlike Blue Apron, Stitch Fix has maintained financial acumen and has been profitable for a while. Additionally, while there is competition in the space, with its curated and highly personalized offerings, Stitch Fix has been able to emerge as a differentiated player in the market. It has successfully integrated its technological platform for feedback analysis with its panel of 75 data scientists and 3,400 stylists.
For now though, its stock is trading at $21.50 with a market capitalization of $2.1 billion. It had fallen to a low of $14.48 soon after listing in November last year. It had climbed to $30.07 in December last year.
I believe, analysts do not yet know how to analyze this company and StitchFix needs to teach the market how to do so. There are numerous questions that come to my mind: what segment of customers constitute the company’s core base? Age? Income group? Demographics? What wallet share does the company capture in this group? Are there opportunities for doing private labeling within their core, most loyal, and active buyers? In what categories? What is the data telling them?
And, for everything they do, there is the looming threat of Amazon copying what they do well, and replicating it in its massive user base. Amazon has started doing subscriptions for many of its categories. Not yet in clothing. But what’s stopping them from doing so? Hence, what is StitchFix’s defense against Amazon?
Finally, is there a rationale for Amazon to buy the company? In the short term, yes. In the long term, probably not. If Amazon chooses not to acquire StitchFix in the next 24 months, then we ought to assume that they would launch something competitive. And that is not good news for StitchFix.
More investigation and analysis of Unicorn companies can be found in my latest Entrepreneur Journeys book, Billion Dollar Unicorns.
This segment is a part in the series : Billion Dollar Unicorns
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